Interviewed in this television documentary on the the economic crisis, Nobel laureate Robert Lucas answered a question (wind to 19:40 in the programme) if the level of debt was a problem, by telling us that the high level of debt is not an interesting problem, since, for a country as a whole, debt and credit always “cancel out.” Unbelievable stupidity even to come from a Chicago economist. Fortunately Dirk Bezemer and Steve Keen were also interviewed and could sort things out and give a more sensible view on the increasing indebtedness of modern economies.

30 Sep, 2013 at 17:36 | Posted in Economics | Comments Off on Alfred Marshall on mathematics in economics

Balliol Croft, Cambridge
27. ii. 06
My dear Bowley,

I have not been able to lay my hands on any notes as to Mathematico-economics that would be of any use to you: and I have very indistinct memories of what I used to think on the subject. I never read mathematics now: in fact I have forgotten even how to integrate a good many things.

But I know I had a growing feeling in the later years of my work at the subject that a good mathematical theorem dealing with economic hypotheses was very unlikely to be good economics: and I went more and more on the rules — (1) Use mathematics as a short-hand language, rather than as an engine of inquiry. (2) Keep to them till you have done. (3) Translate into English. (4) Then illustrate by examples that are important in real life. (5) Burn the mathematics. (6) If you can’t succeed in 4, burn 3. This last I did often.

I believe in Newton’s Principia Methods, because they carry so much of the ordinary mind with them. Mathematics used in a Fellowship thesis by a man who is not a mathematician by nature — and I have come across a good deal of that — seems to me an unmixed evil. And I think you should do all you can to prevent people from using Mathematics in cases in which the English language is as short as the Mathematical …

I met Eugene Fama in his office at the Booth School of Business. I began by pointing out that the efficient markets hypothesis, which he promulgated in the nineteen-sixties and nineteen-seventies, had come in for a lot of criticism since the financial crisis began in 1987, and I asked Fama how he thought the theory, which says prices of financial assets accurately reflect all of the available information about economic fundamentals, had fared.

Eugene Fama: I think it did quite well in this episode. Stock prices typically decline prior to and in a state of recession. This was a particularly severe recession. Prices started to decline in advance of when people recognized that it was a recession and then continued to decline. There was nothing unusual about that. That was exactly what you would expect if markets were efficient.

Many people would argue that, in this case, the inefficiency was primarily in the credit markets, not the stock market—that there was a credit bubble that inflated and ultimately burst.

I don’t even know what that means. People who get credit have to get it from somewhere. Does a credit bubble mean that people save too much during that period? I don’t know what a credit bubble means. I don’t even know what a bubble means. These words have become popular. I don’t think they have any meaning.

I guess most people would define a bubble as an extended period during which asset prices depart quite significantly from economic fundamentals.

That’s what I would think it is, but that means that somebody must have made a lot of money betting on that, if you could identify it. It’s easy to say prices went down, it must have been a bubble, after the fact. I think most bubbles are twenty-twenty hindsight. Now after the fact you always find people who said before the fact that prices are too high. People are always saying that prices are too high. When they turn out to be right, we anoint them. When they turn out to be wrong, we ignore them. They are typically right and wrong about half the time.

Are you saying that bubbles can’t exist?

They have to be predictable phenomena. I don’t think any of this was particularly predictable.

28 Sep, 2013 at 17:47 | Posted in Varia | Comments Off on Songs of Hard Times

What a fabulously majestic voice! And if you have access to Spotify you can enjoy that absolutely incredible voice even more in this superb recording of Sviridov’s masterpiece (and don’t forget to turn up the volume):

The article addresses two very important questions in the teaching of modern econometrics and its different textbooks – how is causality treated in general, and more specifically, to what extent they use a distinct causal notation.

The authors have for years been part of an extended effort of advancing explicit causal modeling (especially graphical models) in applied sciences, and this is a first examination of to what extent these endeavours have found their way into econometrics textbooks.

Although the text partly is of a rather demanding “technical” nature, I would definitely recommend it for reading, especially for social scientists with an interest in these issues.

Pearl’s seminal contribution to this research field is well-known and indisputable, but on the “taming” and “resolve” of the issues, I however have to admit that — under the influence of especially David Freedman and Nancy Cartwright — I still have some doubts on the reach, especially in terms of “realism” and “relevance,” of these “solutions” for social sciences in general and economics in specific (see here, here, here and here). And with regards to the present article I think that since the distinction between the “interventionist” E[Y|do(X)] and the more traditional “conditional expectationist” E[Y|X] is so crucial for the subsequent argumentation, a more elaborated presentation had been of value, not the least because then the authors could also more fully explain why the first is so important and if/why this (in my, Freedman’s and Cartwright’s view) can be exported from “engineer” contexts where it arguably easily and universally apply, to “socio-economic” contexts where “manipulativity” and “modularity” are not perhaps so universally at hand.

25 Sep, 2013 at 19:19 | Posted in Economics | Comments Off on Testing game theory on real people

The “prisoner’s dilemma” is a familiar concept to just about everyone who took Econ 101 …

Yet no one’s ever actually run the experiment on real prisoners before, until two University of Hamburg economists tried it out in a recent study comparing the behavior of inmates and students.

Surprisingly, for the classic version of the game, prisoners were far more cooperative than expected.

Menusch Khadjavi and Andreas Lange put the famous game to the test for the first time ever, putting a group of prisoners in Lower Saxony’s primary women’s prison, as well as students, through both simultaneous and sequential versions of the game …

They expected, building off of game theory and behavioral economic research that show humans are more cooperative than the purely rational model that economists traditionally use, that there would be a fair amount of first-mover cooperation, even in the simultaneous simulation where there’s no way to react to the other player’s decisions.

And even in the sequential game, where you get a higher payoff for betraying a cooperative first mover, a fair amount will still reciprocate.

As for the difference between student and prisoner behavior, you’d expect that a prison population might be more jaded and distrustful, and therefore more likely to defect.

The results went exactly the other way …

The paper … demonstrates that prisoners aren’t necessarily as calculating, self-interested, and untrusting as you might expect, and as behavioral economists have argued for years, as mathematically interesting as Nash equilibrium might be, they don’t line up with real behavior all that well.

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